The last tycoons: the secret history of Lazard Frères & Co
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Bruce was way too smart to allow the underwriters that kind of leverage. And so when Michel introduced the idea of the June 30 deadline, he and Golub went into overdrive to get him to relent and change his mind. Bruce wondered if he was dealing with a "Frenchman who was prepared to destroy his company and lose millions of dollars rather than cede control of it," one person close to him said, or would Michel blink? "In the end," Bruce's friend said, "he bet that David-Weill would blink."
First, Bruce continued his negotiations with the dissidents, who were becoming fewer in number daily as he succeeded in buying their support. Were these bribes? "Absolutely," the French partner Jean-Claude Haas responded. "But Wasserstein had the money to bribe them because he was head of the bank. Michel couldn't have done it. Michel didn't have the means to bribe them." Said an ally of Bruce's: "He was stacking the deck." Bruce was willing to relent on some of the more offensive terms for the dissidents. They didn't have to agree to stay for three years; rather, they could sign a nonbinding statement indicating a willingness to stay for two. They would also be exempted from the salary cuts. For instance, the star banker Gary Parr, who had a four-year, $36 million deal, agreed to support the IPO only after his contract was not impaired.
Golub, meanwhile, was working overtime trying to convince Michel to reverse his decision about the June 30 deadline. He worked closely with Haas to help convince Michel of his error. He also got Tuft, the Goldman partner, to sit down with Michel and get him comfortable with the idea that Goldman thought the deal would be a success, especially if the false deadline was removed. Golub was helped immeasurably in his tasks by improving market conditions for M&A and IPOs, which began to make more credible for Michel the business plan Golub created. In short order, the spinning began, and Michel's conditions seemed to melt away. "The conditions are not seen as that important," one Lazard source told the Times of London. "What is important is that David-Weill has agreed in principle to an IPO and that an agreement has been reached on a price for the capitalists' stakes." Some Eurazeo directors--in particular those representing Credit Agricole--claimed Michel's comments about Bruce having to resign were made in "a personal capacity" and had not been endorsed by the Eurazeo board. Eurazeo itself released a statement confirming that its board had "authorized the pursuit of these negotiations" that could lead to the IPO, from which, if successful, Eurazeo would receive "a 100 per cent cash payment of $784 million," a huge development in its desire to transform itself into an active, independent private-equity fund.
Then came articles that reported the working partners were growing restless and angry. They had had enough of the disagreements between Michel and Bruce, which were beginning to hurt business. There were also reports that Bruce was close to reaching an agreement with a state-owned French savings bank, Caisse d'Epargne, to act as an "anchor tenant" for the IPO by buying a 5-10 percent stake in Lazard at the IPO price. In exchange, the bank would get a Lazard board seat and additional support for its joint venture between Lazard and CDC Ixis, Caisse d'Epargne's investment banking affiliate. Once again, Bruce had found a way to seduce a foreign bank; he also scored a public relations coup in his tug-of-war with Michel by getting a member of the French establishment to support him.
Momentum was building for the offering. Michel then told the Financial Times that he was "just trying to do what is best for the firm: to have it unified without me on a public project or unified with me on a private project." He added, with a breath of conciliation, that he liked Bruce. "In fact, I have a great deal of admiration for Bruce Wasserstein's intelligence and his dynamism," he said. "I actually like him, that is the funny part. The real problem is that we have a different conception of the future of Lazard. His conception is for it to become a public company, governed by the rules and duties pertaining to that status, while I am very attached to the concept of a private firm of partners at the service of clients." He said these "irreconcilable conceptions" were tearing the firm apart. "The gossip is like being asked 'Are you divorcing?' every day," he continued. "I am sure it is not good." But since he stood to reap hundreds of millions of dollars from a successful IPO, he took the opportunity to remark upon the firm's resilience. "If you look at the press coverage, you have to be impressed that the aura of the place is very great," he said. "It has carried us through tough times and may well carry us through to a public offering." Personally, he allowed that the potential sale of his birthright was "heartbreaking" and said, "I've lived every day for 45 years thinking, worrying and being elated by the successes of this firm," and then warned Bruce, "We could simply say 'no,' of course, which we have the right to do."
In the end, Michel's pragmatism overpowered whatever remaining shred of sentimentality he had for Lazard. The succession wars--which started in 1992 when Michel unilaterally brought Edouard Stern to Lazard and had come close to ripping the firm apart on any number of occasions during the ensuing twelve years--had reached their apex. Michel simply could not suit up for another battle. He was seventy-two. He was the father of four daughters who knew better than to pursue a role at the patriarchal Lazard. He had tried a procession of bright, ambitious men at the helm, but since Michel was unwilling to cede power to them, they quickly grew frustrated and left or melted down, or both. Braggiotti, it turned out, was not an appealing alternative, since he would not give Michel what he wanted, either. He had tried selling the firm, but when his preferred suitor, Credit Agricole, unexpectedly balked, he thwarted the entire sale process. He finally consummated his decades-long infatuation with Bruce, only to find the affair one-sided. It turned out Bruce had no love for Michel; the younger man's passion was only for fulfilling his massive ambitions. Michel was simply a means to an end.
Michel's desperation had thrown him into the arms of the one person with the tactical ability and unrequited desire to outmaneuver him. The war was over. Of course, Michel could stop Bruce at any moment. All he had to do was vote no. But he couldn't do it. Even though he recognized his mistake in choosing Bruce. Even though he wanted the firm to remain private. Even though new leaders were available. Even though he was rich enough already. Huis clos. He had no exit, making the ultimate capitulation inevitable. Fortunately for Michel, he was "blessed with the psychological trait that I have no regrets."
On December 3, the Wall Street Journal reported that a compromise between the two men was imminent. Golub and Bruce had succeeded in negotiating a deal with Haas and Michel. In exchange for "undetermined concessions" by Bruce, Michel would relax the artificial June deadline. Finally, the two bucking rams signed their peace accord, however shaky, on December 6. In a joint statement issued simultaneously in Paris, London, and New York to the firm's partners, Michel green-lighted Bruce's pet project, at a price. "If the IPO or the buyout of the historical partners were not to be completed by the end of 2005, Lazard would continue as a private firm," the statement read. "In that case or in the event Mr. Wasserstein abandons the project earlier, over the ensuing three-month period we would work together with our partners and the Lazard Board to evaluate all strategic and governance alternatives that are in the best interests of the Firm and its partners. Mr. Wasserstein's current employment agreement would expire at the end of that three-month period. If during that three-month period Mr. Wasserstein and Mr. David-Weill so desire, they would negotiate a new employment agreement subject to the approval of the Lazard Board. We look forward to a continued vibrant future for Lazard. Whether public or private, Lazard will continue to provide outstanding advice and support to its clients."
Despite the accord and Michel's comment that he was a great admirer of Bruce, the palpable tension between the two men was on full display during an interview they gave to the Wall Street Journal at the Lazard Paris offices. As they sat together at a pear wood table in one of the firm's conference rooms, they acted very much like a warring married couple that had finally filed for divorce. "We have to be as unselfish as we know how to be," Michel said. Bruce compared the Lazard he found upon his arriva
l in 2001 to a house needing serious renovation. The firm needed "an extra steel beam and a cement support," Bruce said. "Once you have a strong foundation you're ready to go." Michel interjected to insist Bruce failed to consult him "about how the house was reconstructed. I received the bill, and I wasn't perfectly satisfied. I had one power and that was to be unhappy." (Michel later confessed to having one sole regret: not having forged a "better, more intimate relationship with Bruce.")
As to their May 2004 disagreement that led to the public release of their feisty letters about how to look at the firm's profitability, Michel said he felt "very good about the letters I wrote in May." To which Bruce snapped: "I feel good about my letters, too." He added that he intentionally had very little interaction with Michel during 2002 and 2003 so as to make clear that he had no interest in being mesmerized by Michel, as had previous partners. He sought to eschew "the history of ambiguity of authority between Michel and previous managers," he said. "I didn't want a system where we didn't have coherence."
There was no ambiguity, though, in the fact that Bruce had just put his career at Lazard on the line for the chance to get rid of Michel. Marty Lipton, the dean of Wachtell, Lipton and a longtime Lazard lawyer, believed the IPO was a brilliant compromise. "There are clearly two different points of view, and intelligent people sat down"--among them his partner Adam Chinn--"and worked out a resolution of it." But Jean-Claude Haas, Michel's consigliere through the tempestuous negotiations with Bruce, said that for potential investors the Lazard IPO was simply "an act of faith."
FRIDAY, DECEMBER 17, 2004, at 4:44 p.m. was a moment that few of the tens of thousands of people who had ever had anything to do with Lazard thought they would live to see. At that time, the Securities and Exchange Commission acknowledged receiving a Form S-1 registration statement, under the Securities Act of 1933, for the initial public offering of the investment banking firm now known as Lazard Ltd. By any measure--as originally filed or as subsequently amended over the next few months--the S-1 was a stunning document. For the first time in its 156-year history, Lazard's financial performance was revealed publicly--specifically for the years 2002, 2003, and 2004--as required by the SEC. Some of the data even went back five years. The information showed what many had come to believe of Lazard: until Bruce took over in 2002, the firm was obscenely profitable despite having--or using--little capital. And even under Bruce's command, the firm's operating income and margins were enviable, hovering around 30 percent year after year. What was also clear was the extent of the near meltdown in 2001, when operating income fell to $359 million, from $676 million in 2000, down 47 percent. M&A revenue in 2002 was $393 million, down 46 percent from $725 million in 2000. The effect of Bruce's spending spree throughout 2002 and 2003 could also be appreciated. The partners' capital, which had been built up to $705 million when Bruce took over--well beyond the $17.5 million in capital that Andre intentionally insisted was all that the firm had available--had plummeted to $385 million by the end of 2004, all as a result of absorbing the losses Bruce was racking up. (Goldman Sachs's total capital, meanwhile, both debt and equity, was closer to $60 billion.)
Financial disclosure aside--and truthfully, much of the key data had leaked out over the years--the S-1 filing had the feel of being part of some master plan Bruce had envisioned from the outset. He had continuously shown that he was willing to sacrifice short-term profitability for long-term equity value. He had done that at Wasserstein Perella, when, although the firm nearly ran out of cash, he was still able to sell it to the Germans for nearly $1.6 billion, including retention bonuses. To Michel's ongoing chagrin, he had done the exact same thing at Lazard. Cash dividends to the nonworking shareholders were eliminated as short-term expenses soared. In the fall of 2003, he repeatedly tried to sell the firm in an effort to replicate the Wasserstein Perella experience. He insisted on a high price, for sure, which the market rejected time and again. That was okay, too, for Bruce knew he was rapidly approaching his first window of opportunity to sell the firm publicly. The SEC requires new issuers to include three years of audited financial data in an IPO prospectus. So no matter what, the earliest moment that the filing could have been made to comply with that requirement and to coincide with Bruce's tenure as head of Lazard was December 2004, when he was ending his third year at the helm. Of course, the high tide of the improving M&A market and the performance of Greenhill & Co.'s IPO lifted Lazard's boat, too, and gave the underwriters the confidence a deal could happen, even with the discrepancy between the price the capitalists would receive and the price the public would pay.
Some of his partners have said that Bruce--the Genius--had even anticipated the rebound of the cycle in the fall of 2004; he's just that smart. He even more or less said so himself when speaking to a group of Yale MBA candidates in September 2005. "So we're at the beginning of a resurgence of M&A activity," he lectured. "Cyclically, this has been going on since the Civil War. It goes in spurts every decade or so. There's a five-year period where M&A accelerates, and then it slows down. Lots of things intervene. And right now, we're at the beginning of the surge.
That's my view. So, as it rebounds, of course the critics of M&A resurface, including many members of your faculty, I gather." One of Bruce's former partners at First Boston, Mike Koeneke, who was also once co-head of M&A at Merrill Lynch, agreed Lazard's filing was well conceived. "His timing as always is exquisite," Koeneke told Bloomberg of Bruce. "With all the merger news coming out, he's hitting it perfectly. I think it will be well received."
Others were immensely more skeptical. Upon learning that Lazard was attempting an IPO, Damon Mezzacappa, the former head of Lazard's capital markets business, expressed disbelief. "I'll be stunned if this company can go public, but stranger things have happened," he said, adding, presciently, that in his view the only way it could happen would be for Bruce to show Lazard's financials on a "pro forma" basis that backed out the hefty compensation guarantees he had been making to new partners.
Felix was more incredulous still, at least at the outset. "First of all, I think Bruce is very intelligent, and therefore whatever I say now, he knows, and therefore there must be something more to it," he began.
It's hard for me to conceive that you can go to the public and sell stock in an enterprise which immediately will use that money to bail out the controlling shareholder at a price two or three times what the stock is worth. And leave behind an overleveraged, weak firm with a history of great internal factions. I don't know how you convince people to do that unless you've got it set up in some way with some institutions that for one reason or another are willing. But it's difficult. But is the firm viable once you've done that? That's why I'm still waiting for the other shoe to drop, [for] somebody to come and buy the firm. Because I think what Michel could have done, if he really wanted, [and] I think he really would like to have this firm back, is say to Bruce, "Look, I'll buy you out. And I'll keep my shares, and I will vote my shares in support of Ken Wilson or Gary Parr or whoever, you know, and I'll be there as the controlling shareholder, but I'll be there supporting the management."...I mean here he stands for the tradition of 150 years, for family ownership, for private ownership, all the things that he says he values, and if this deal happens--which I still don't believe it will--he will strip the firm of any future for the next X years.
As the IPO looked increasingly likely, Felix changed his mind and thought the deal would happen. "I was wrong," he said. Despite his blessing, even Michel was skeptical--in January 2005 anyway--that the IPO would happen because of the plethora of problems that needed to be solved.
"I'm very uncertain it will occur," he said. "In my opinion there are quite a few unresolved problems at this time and very few people working on it. I mean, working very hard, but very, very few."
But it was in the S-1's abundant details weaved throughout its 173 legalese-laced pages that Bruce's true genius--and that of his high-priced bankers at Goldman Sachs and lawyers at Wachtell and Cravath--became apparent
. The Lazard IPO was nothing less than a testament to Bruce's creative brilliance and audacity. He had many problems to solve simultaneously. And one by one, he solved them. First, he had to focus the offering on those parts of Lazard that would appeal to investors. In this he had help from Goldman, which told him that Lazard Ltd. should look as much like Greenhill as possible and comprise only Lazard's M&A, restructuring, and asset management businesses. (Greenhill's stock had appreciated more than 50 percent between its IPO and Lazard's first filing.) M&A was growing well, and when that slowed, the restructuring business would kick in; the asset management business, meanwhile, provided a steady stream of profitability. That would be the public company, some $1 billion in worldwide revenue and 2,339 people. Left out of the IPO festivities would be Lazard's unprofitable capital markets business and its private-equity fund management business (but the French units in these areas would be part of the public company). Also left behind were "specified nonoperating assets and liabilities" that would detract from the profitability of the public company. These included an unfunded pension liability in the U.K. and the lease payments on Lazard's empty old building in London. The capital markets business, which would continue to be affiliated solely with Lazard, would be owned by all of the working partners, some of whom would be in the public company and some of whom would be at the capital markets business. About half the profits of the capital markets business would be transferred to the public company in recognition of the role the M&A bankers would have in generating financing deals. As for the private-equity business, Lazard would retain a nine-year, $10 million option to buy it, which will no doubt be exercised when the business starts becoming profitable in a few years after investments begin to pay off.